The word itself is enough to cause shudders in entrepreneurs. One benefit of owning your own business is not having to deal with the bureaucracy and process that comes with working for a big company. Your successful small business is likely the result of you having a deep understanding of your customers, your product, and your team—all things that can bring joy and pure satisfaction.
For many entrepreneurs, accounting is one of, if not the, least fun items on their plate. This dislike can often lead to small business owners underinvesting in their financial operations often to dire consequences.
Early on in my business, one of my advisors hammered home to me just how crucial this not-so-fun stuff was. Her advice: Build healthy habits early. Like exercise and nutrition, having the right habits today prevents future problems and allows you to do things as you age, you may never have imagined.
To that end, there are three habits that any owner should adopt. Following these three doesn’t ensure your business will be a wild success, but it does help ensure it won’t be a victim of an unintended financial error.
As a small business owner, you have the weight of your entire business on your shoulders. But sometimes that weight is just truly too heavy. If you don’t enjoy finance, this is one of the most manageable stressors to outsource. There is an abundance of providers who can help you with everything from bookkeeping and payroll to sophisticated modeling.
There are two main types of providers to consider.
What you need will depend on the complexity of your business. However, you build an outsourced team, having these resources are essential. You didn’t become an entrepreneur to become an accountant, but you still need to understand the health of your business.
You may have been there before. A whole year has gone by, and it’s time to do your taxes, but you haven’t kept good records, and you now have to spend February and March chasing down records. As you reverse engineer your finances, you discover unnecessary expenses and costly surprises. Worse, you might realize you’re in a more precarious situation than you’d expect.
Luckily, this is avoidable by following a simple rule: Close your books monthly.
In bookkeeping, closing the books means accurately tracking your revenue and expenses and ensuring your balance sheet matches what is actually in your bank account. To do this, you need to have a clear policy with your internal or outsourced accountants. More importantly, you must enforce this policy and track whether it is complied with (the longer you wait after the end of the month, the harder it can be to close the books).
But this isn’t just a matter of hygiene. By having this semi-real-time pulse of your business, you have the opportunity to pivot when there are problems and invest when there are opportunities.
Let’s say you want a small business loan. Understanding when to seek out a loan can help ensure that you don’t get it too early (and pay unnecessary interest) or too late (and risk financial crisis). Or, if you’re a startup that will raise investor capital, knowing when to raise more money can help ensure you are negotiating from a position of strength. You don’t want to be negotiating to keep the lights on when the lights are flickering.
This one is where I tend to lose people. Auditing your financials is the process of having an outside accounting firm come in and review your balance sheet, financial statements, and accounting processes. Getting audited might sound like something you only do if you’re in trouble or if you’re a large company, but that is far from the truth.
As one of my mentors told me, “A good company is an audited company.”
Getting audited has lots of benefits. First, it helps you prevent fraud. Those horror stories of a rogue employee or vendor embezzling money? If you are audited, an auditor can help you catch those and identify any point in your accounting process, which may be susceptible to being attacked.
To that end, an auditor will also point out any other issues with your accounting processes that may cause trouble in the future. Knowing these can help you avoid problems and save money in the long run.
But an auditor doesn’t just help you avoid scary stuff. It also enables you. If you ever decide to sell your company, having audited financials may be a requirement from the buyer. Even if it’s not mandatory, companies with audited financials routinely fetch a higher price since there is less risk of discovering surprises.
And it’s not just when selling. Many investors will require more mature companies to have audited financials before they wire funds. Sure, you can rush and sprint to do this for the past when you are looking to sell or raise capital, but this adds complexity and delay (and cost!). Worse, you might uncover surprise problems that scare off potential acquirers or investors.
You may think that hiring an auditor means hiring some large accounting firm and shelling out Scrooge-McDuck-levels of money. But there are plenty of smaller accounting firms that are reputable and known for conducting high-quality audits at a fraction of big firm prices.
Having proper financial operations is a traditional case of preventive medicine. Sure, you could wait until you have a financial heart attack and attempt to fix it, but taking the right steps now will both help you avoid crises and unlock opportunities.
I get it. Bookkeeping, charts of accounts, balance sheets, are all scary words. Just writing them makes me think about spreadsheets and long, eye-strained working sessions. But by using outside resources effectively, setting good policy, and ensuring that everyone follows it, finance came to become a strength for your business and give you comfort that your company is on a healthy financial footing.